Lesson 1. What you actually sold

1 In plain English

You signed a document that probably never uses the word "loan." On paper, you did not borrow anything. You sold something: a piece of your future sales, for cash today. That one idea explains almost everything else in your agreement.

A merchant cash advance, or MCA, is set up as a purchase. The funder pays you a lump sum. In return, you agree to hand over a fixed dollar amount from your future sales. The contract may call it a "purchase of future receivables," a "sale of future receipts" or something close to it. Whatever the name, there are four numbers that matter.

• Purchase price. The cash the funder pays for your future sales. This is the headline number in the offer.
• Purchased amount. The dollar total you agree to deliver back. Some contracts call it the "receipts to be remitted." In plain words, it is what you owe, even if the contract avoids that word.
• Factor rate. The purchased amount divided by the purchase price. A factor of 1.35 on $50,000 means $67,500 comes back. It is a multiplier, not a yearly interest rate. Lesson 2 shows why that difference matters.
• Specified percentage. The share of your sales the funder says it bought. In our example, 12%.

You do not usually pay the percentage directly. Instead the funder takes a fixed debit from your bank account, daily or weekly. That number was picked at signing as the funder's best guess at the specified percentage of your sales. Lesson 3 is about the gap between the guess and what actually happens.

Why it is written as a sale

Loans are covered by limits on interest rates, often called usury laws. Sales are not. That is a big reason MCAs are written as sales. The idea is that the funder takes a real risk: if your sales slow down, the payments should slow down too.

When courts look past the paper

Courts have sometimes asked whether an MCA behaves like a sale or like a loan. In New York, they tend to look at three questions:

1. Is there a real reconciliation provision? If payments are meant to follow your sales, there should be a way to lower them when sales fall. A clause that lets the funder refuse "in its sole discretion" counts for less.
2. Does the agreement have a finite term? A deal with no end date, where the funder collects until it has the full amount however long that takes, looks more like a loan.
3. Can the funder still collect if the business goes bankrupt? In a true sale, the funder carries that risk. Terms that make bankruptcy a default, or let the funder go after the owner for the full amount, point toward a loan.

These are factors, not a checklist. Judges weigh them together. In a 2020 decision, a New York appellate court found a triable question about whether an agreement was a usurious loan, partly because the reconciliation clause let the funder adjust payments "at its sole discretion." In a 2022 decision, another appellate ruling went the funder's way. The court looked at the reconciliation provision, the finite term and the bankruptcy terms, and found a true sale.

2 Find it in your contract

3 What it means for you

Here is a made-up deal from "Funder A." Every number below is worked out from the first four, so you can check the math yourself.

Three things stand out. First, the factor rate of 1.35 sounds like 35%, but it is a multiplier on a short deal, and the real cost is higher once fees are counted. You will see how much higher in lesson 2. Second, the cash that lands in the account is $48,250, not $50,000, because $1,750 in fees came out first. Lesson 5 takes the fees apart.

Third, look at the last row. A fixed debit of $535.71 a day adds up to $11,250 a month. If that is meant to be 12% of your sales, then the funder assumed you would have $93,750 in sales every month. If your real sales are lower, the same debit takes a bigger share. That is the gap the rest of the course keeps coming back to.

4 Watch for

• A fixed payment next to a "percentage of sales" promiseLook for the words that connect the two. If the contract says the payment is a good-faith estimate of your percentage, there should be a way to fix it when the estimate is wrong.
• "Sole discretion" near the reconciliation clauseThis means the funder decides, with no standard it has to meet. It is the wording courts have pointed to when they asked whether a deal was a loan.
• A term with no end dateIf the contract says payments continue "until the purchased amount is paid in full" and gives no outer limit, note it.
• Bankruptcy listed as a defaultIn a true sale the funder is supposed to bear that risk. Note whether the agreement says otherwise.

5 Do this now

1. Put every page of your agreement, plus any renewals and amendments, in one folder or one PDF. Missing pages are the first thing to fix.
2. On one sheet of paper, write the four numbers: purchase price, purchased amount, factor rate and specified percentage. Divide the purchased amount by the price yourself to check the factor.
3. Search the PDF for reconcil, term and bankrupt. Put a sticky note or highlight on each place, so you have the three court questions marked before lesson 4.
4. Do not call the funder yet, and do not change anything about your payments. This lesson is about reading. The next ones are about using what you read.

6 Quick check

Sources

• Principis Capital, LLC v. I Do, Inc., 201 A.D.3d 752 (N.Y. App. Div., 2d Dep't 2022)
• LG Funding, LLC v. United Senior Properties of Olathe, LLC, 181 A.D.3d 664 (N.Y. App. Div., 2d Dep't 2020)

General education, not legal advice. Your agreement's exact words control. For legal questions about your agreement, talk to a lawyer.